I have changed undo_management to Manual. And I have not dropped old tablespace PSAPUNDO yet,
I have restarted the system and initially the database was not open.
I gave command alter database open and opened it.
The oracle has been started normally. But still SAP instance cannot be started.
Last few lines of aler log:
------------------------------------------------
Sun Jan 06 04:05:12 2013
Completed: ALTER DATABASE OPEN
Sun Jan 06 04:06:08 2013
Shutting down archive processes
Sun Jan 06 04:06:13 2013
ARCH shutting down
ARC2: Archival stopped
Adjusting the default value of parameter parallel_max_servers
from 160 to 65 due to the value of parameter processes (80)
Sun Jan 06 04:06:29 2013
Starting ORACLE instance (normal)
Sun Jan 06 04:14:09 2013
Errors in file d:\oracle\sol\saptrace\background\sol_smon_3796.trc:
ORA-00604: error occurred at recursive SQL level 1
ORA-00376: file 2 cannot be read at this time
ORA-01110: data file 2: 'D:\ORACLE\SOL\SAPDATA1\UNDO_1\UNDO.DATA1'
----------------------------------------------

I have changed undo_management to Manual. And I have not dropped old tablespace PSAPUNDO yet,
I have restarted the system and initially the database was not open.
I gave command alter database open and opened it.
The oracle has been started normally. But still SAP instance cannot be started.
Last few lines of aler log:
------------------------------------------------
Sun Jan 06 04:05:12 2013
Completed: ALTER DATABASE OPEN
Sun Jan 06 04:06:08 2013
Shutting down archive processes
Sun Jan 06 04:06:13 2013
ARCH shutting down
ARC2: Archival stopped
Adjusting the default value of parameter parallel_max_servers
from 160 to 65 due to the value of parameter processes (80)
Sun Jan 06 04:06:29 2013
Starting ORACLE instance (normal)
Sun Jan 06 04:14:09 2013
Errors in file d:\oracle\sol\saptrace\background\sol_smon_3796.trc:
ORA-00604: error occurred at recursive SQL level 1
ORA-00376: file 2 cannot be read at this time
ORA-01110: data file 2: 'D:\ORACLE\SOL\SAPDATA1\UNDO_1\UNDO.DATA1'
----------------------------------------------

what happened prior to this that you have not told us about?
For how long has Oracle been complaining about PARALLEL_MAX_SERVERS?
why can't Oracle access 'D:\ORACLE\SOL\SAPDATA1\UNDO_1\UNDO.DATA1'?

Hi it is not clear the scenary.
First why do you set up the undo_management in manual?
Second why do you do recover the tablespace psapundo1?
Please confirm it also which is the error in the log of sap?

Thanks for your reply. When I checked SAP down issue(around 6th Dec) I had exteneded the tablespace PSAPUNO and PSAPSR3 with brtools and restarted the server.
Then I checked further and found the problem was PSAPUNDO needs recovery.
Then I created another tablespace PSAPUNDO2 and altered system. (See my previous post).

I am not sure what caused this error: ORA-00376: file 2 cannot be read at this time

I think there is no issue with Parallel_Max_Server as I can see its entry in Alert log since 2007.
-----
Thu Oct 25 20:48:48 2007
Adjusting the default value of parameter parallel_max_servers
from 160 to 65 due to the value of parameter processes (80)
Thu Oct 25 20:48:48 2007
Starting ORACLE instance (normal)
--------

I changed the undo_management to manual for recreation of tablespace PSAPUNDO2.
There is no tablespace called PSAPUNDO1.
PSAPUNDO is the old tablespace which needs recovery for which I recreated PSAPUNDO2.

Are you asking me to run the following command:
SQL>alter system set undo_tablespace=PSAPUNDO scope=spfile;
Do you want me to copy paste the alert log after running the command?
But the old tablespace PSAPUNDO is corrupted and needs recovery.